Fund Companies Still Dragging Their Feet on Disclosure

You probably don't know what stocks or bonds are in your mutual funds right now. What's more, fund companies say they'd like to keep it that way.

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Funds are required to list their full holdings just twice each year, in reports shareholders get in the mail. Recently, upstart fund shops like MetaMarkets.com have argued that fund companies should use the Internet to show shareholders more regularly where their money is invested. But in a letter sent Tuesday to the Securities and Exchange Commission, the Investment Company Institute, the mutual fund industry's largest trade group, vigorously argued against more frequent portfolio disclosure.

The industry wants to streamline shareholder reports, which is a good idea. But it would let funds do so by disclosing less information. After all, fund companies argue, investors will be the ultimate losers if funds have to disclose their holdings more often.

TheStreet.com has argued for more frequent portfolio disclosure, so you know how we come down on this. We also chatted Tuesday with Russ Kinnel, director of fund research at Chicago fund-tracker Morningstar. Like us, he loves the idea of more readable reports, but isn't so sure it makes sense to tell investors less about where their money is invested.

Post Up

"Improving the quality of shareholder reports is a good thing, but I would think there would be an easy way for fund companies to post monthly or quarterly holdings on their [Web] sites," says Kinnel. "A couple of weeks ago, [former Vanguard executive] Jack Bogle told us that putting out monthly reports would be costly, but he didn't see any problems with putting them on the Web."

The ICI letter says its members report "virtually no demand from fund shareholders for more frequent portfolio holdings disclosure." But in a conference call, ICI general counsel Craig Tyle admitted that his organization hadn't surveyed investors on the question. And Kinnel says investors and financial advisers are hungry for more recent information.

Consider the many investors who thought their five-fund portfolio was diversified last year, but then discovered that their growth and tech funds owned many of the same stocks. Instead of weathering the storm with a loss around the S&P 500's 9.1% tumble in 2000, their losses were more in line with tech-laden Nasdaq Composite's 39%. In the wake of last year's losses, some managers have ratcheted down their tech exposure, while others still are overweighting the sector. Fuller and more frequent disclosure, already provided by many fund shops, would help investors know where they stand.

Gamy

"Especially after the past year, people have to be on top of things," says Kinnel. "I can tell you from my end that we get complaints all the time that Fidelity or Putnam portfolios are 7 months old."

Fidelity and Putnam, two of the nation's five-largest fund shops, disclose their fund's complete holdings just twice a year, though each provide funds' top 10 holdings and sector weightings more frequently on their Web sites.

The ICI's concern that traders could game funds' trades shouldn't be shrugged off -- though Tyle admitted that "a quick scan" found only three Web sites advertising trading services based on fund holdings.

Massive funds can take weeks to build or unwind a position, potentially giving traders the chance to buy or sell ahead of a fund manager, which could reduce returns. But the American Funds, managers of huge funds like the $56.9 billion (AIVSX Quote)Investment Company of America and the $49.1 billion (AWSHX Quote)Washington Mutual fund, posts funds' complete holdings quarterly on its Web site within 30 days of the quarter's end.

Middle Ground

While it's certainly true that Metamarkets.com's $10 million (OPENX Quote)OpenFund, which posts its holdings online in real time, has a much easier time with disclosure than the $88.2 billion (FMAGX Quote)Fidelity Magellan fund, it seems that there is a possible compromise between immediate disclosure and a shareholder report in your mailbox with holdings from eight months earlier.

"If you establish a quarterly release with a two-month lag, that's still a tremendous improvement. That makes it 2 to 5 months old, as opposed to between 2 and 8 months old," says Kinnel. "I think there's a middle ground. If a fund can't finish what they're trying to do with a position in two months, maybe they should share that with shareholders, too."

Beyond rejecting the idea that funds report full holdings more frequently, the ICI's letter also argues regulators should loosen some current requirements. Fund companies already report firmwide holdings quarterly to regulators in its 13-F filings, which are posted online at sites like FreeEdgar.com and LionShares.com, among others.

The letter proposes streamlining shareholder reports and making them more readable by listing only a fund's top 50 holdings, or any holdings comprising more than 1% of a fund's assets. Holdings could be represented graphically through pie charts rather than in dreary text, according to the letter, while full portfolio holdings would be available upon request.

Because the quarterly 13-F filings often aren't used by fund shareholders and don't tell them much about what their specific fund or funds own, this issue seems a bit off topic. Of course, these filings do show that fund companies can report holdings quarterly, because they already do. As for jazzing up shareholder reports, that's a great idea. It just doesn't seem sensible to tell investors less about what they own.

The bottom line is that quarterly holdings disclosure with a 1-month lag seems sensible. There might not be any business where you fork over more money and know less about what you're getting return than the fund biz. To Kinnel and his colleagues at Morningstar, the issue boils down to fund companies treating investors as owners and not consumers.

I agree.